During your life, you will undoubtedly work hard, invest prudently, and save wisely in order to amass a respectable estate to carry you comfortably through your “Golden Years.” If all goes as planned, you even hope to have sufficient assets left over to pass down to children and/or grandchildren after you are gone. For that to occur, however, you must protect the assets you acquire during your lifetime. One potentially serious threat to your assets is the impact federal gift and estate taxes will have on your estate after you are gone. To help you understand the need to plan accordingly, the Grand Forks estate planning attorney at German Law explains why you need to plan for the impact of taxes in your estate plan.
Federal Gift and Estate Taxes Explained
Every estate is potentially subject to federal gift and estate taxes. The federal gift and estate tax is basically a tax on the transfer of wealth that is collected from your estate after you are gone and during the probate process. The tax applies to all qualifying gifts (just about every gift you make will be considered a “qualifying” gift) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $6 million in value. Your estate, at the time of your death, was valued at an additional $14 million. The combined total of $20 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate fluctuated on a yearly basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, your $20 million estate would owe a staggering $8 million in federal gift and estate taxes! That is $8 million that could have gone to your loved ones instead of Uncle Sam had you planned for the impact of estate taxes within your estate plan.
2018 Changes to the Lifetime Exemption
Each taxpayer is entitled to utilize the lifetime exemption prior to calculating the amount of gift and estate taxes owed by his/her estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. For 2020, the individual exemption amount is $11.58 million. Using that figure, your $20 million estate would now only pay gift and estate taxes on $8.42 million, reducing the amount of federal gift and estate taxes to $3.37 million. While $3.37 million is certainly better than $8 million, that is still several million dollars that could be used by your loved ones. The good news is that by incorporating asset protection tools and strategies into your existing estate plan you can preserve much more of your hard-earned assets, thereby keeping them out of the hands of Uncle Sam.
Protecting Your Assets for the Tax Threat
Planning ahead allows you to make use of a variety of asset protection tools and strategies aimed at reducing your taxable estate. The annual exclusion is an excellent example. The exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2020) to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000. By way of illustration, imagine that you started using the annual exclusion this year by making gifts to your four adult children and six grandchildren. You also take advantage of the gift-splitting option by combining your gift with your spouse. This year alone you are able to transfer $300,000 ($150,000 of your assets and $150,000 of your spouse’s) in assets tax-free. Over the next ten years, you will pass down $3 million ($1.5 million of yours and $1.5 million of your spouse’s) in assets without those gifts counting against your lifetime exemption. You will also have reduced the value of your taxable estate from $20 million to $18.5 million, further reducing the impact taxes will have on your estate after your death.
Contact a Grand Forks Estate Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about how taxes might impact your estate plan, contacta Grand Forks estate planning attorney at German Law by calling 701-738-0060 to schedule an appointment.
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